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Book It Better: Shifting to Recurring Revenue

By TC Doyle
July 17, 2014 - Article

T.C. DoyleEvery month, tens of thousands of technology business consultants start with little or nothing in the way of momentum. They have no revenue booked, in other words. This means their salespeople hit the streets with 100 percent of a quota to retire, each and every month.

But not savvy organizations. In many instances, they start every month with 10, 20 or even 40 percent of their expected bookings already accounted for. In some organizations, the percentage is even higher. How do they do it? They sell information and communications technology (ICT) solutions as recurring revenue, not one-time transactions.

To do this, savvy IT business consultants pursue a simple formula: They think long-term, repackage or embrace new deliverables, and focus on business needs, not technological capabilities. Those who have pursued this philosophy have realized a number of benefits as a result. They have developed greater predictability within their own organizations and increased their customer “stickiness," organization scalability and, most notably, their overall valuation.

Martin Wolf Securities, a San Ramon, California, company that helps broker mergers and acquisitions between companies in the ICT channel and services community ranks recurring revenue along with growth and profitability as the most important valuation driver for solution provider organizations.

“Certain IT segments have more recurring revenue streams or business models. If possible, moving a portion of your business to a recurring model will boost valuations," said executives at Martin Wolfe Securities. “For example, software companies have recurring maintenance revenue. Hosting and managed services companies, database management companies and certain back-office outsourcing companies have more significant portions of recurring revenue. Those companies are more desirable M&A targets to be more popular and enjoy better valuation multiples. For the same reason, the portion of revenue that recurs is valued higher than the rest of the revenue."

Given the benefits of the business model, many ICT business consultants say developing recurring revenue has become a top priority for these and many other reasons. “Recurring revenue is the goal of almost every partner that I talk to, whether large or small, for a variety of reasons," said Vince DeLuca, COO of Logicalis US, one of the largest and most successful HP, Cisco and IBM business partners worldwide. “There’s the smoothing of business predictability, the stickiness with clients, etc., etc."

While many ICT companies, especially those with roots in telecom services, generate a significant portion of their business from recurring revenue contracts, the vast majority of the approximately 75,000 traditional data VARs and solutions providers based in North America do not. Why so little, given the obvious benefits to the model? Two reasons: a tendency to fall on old, familiar ways and uncertainty over how to switch to a new and different business model (see “Transactional vs. Recurring Sales — Which Is Better?").

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